One of the world’s richest pension funds, the Canada Pension Plan Investment Board, may open an Australian office as its holdings here — or through Australian managers — reach nearly a third of its global real estate investments.
Almost $29 million out of every $100m invested by CPPIB in real estate has been placed with Australian managers for investment in Australian and global markets.
Following last month’s completion of the $3 billion takeover of the Commonwealth Property Office Fund (CPA) jointly with Dexus Property Group, its equity commitment to Australian real estate has risen to more than $4.5bn with a further $5bn to be jointly invested with Australian companies in the US, Britain and China, Graeme Eadie, CPPIB’s senior vice-president, head of real estate investment, told The Australian.
CPPIB, which is Canada’s largest pension fund manager, had been able to find high-quality Australian operators who fitted its investment program, Mr Eadie said when asked about CPPIB’s Australia-heavy investments. CPPIB also has strong relationships with US and Canadian companies.
A crucial factor was the willingness of Australian companies — whether Westfield, Goodman Group or Dexus Property Group — to invest, often as equal partners, alongside the Canadian fund. “CPA has 21 buildings and that in itself is attractive to us. We are also partnering with an operator (Dexus) who we know has the management skills to maximise the value of the portfolio,” Mr Eadie said.
Asked if he was concerned that Australia’s office market suffered from high vacancies and soft tenant demand, Mr Eadie said that the fund invested for the long term, with all markets going through cycles.
“We don’t always have the ability to pick our moments, but the Australian market has (so far) performed well and its economy continues to grow.”
Mr Eadie said the fund was comfortable with its exposure to the office component of the Barangaroo urban regeneration project on the Sydney Harbour foreshore. CPPIB’s $1bn investment in Towers 1 and 2 in Barangaroo has helped underpin Lend Lease’s ambitious $6bn redevelopment.
But what about development risks? “We are a large fund and so it is a relatively small exposure. We expect higher returns commensurate with the higher risks involved,” he said.
Mr Eadie likes the location of Barangaroo, and believes the demand for good quality offices in Sydney — and, indeed, around the world — will continue to be strong. Lend Lease, he said, had managed to secure leasing precommitments, which mitigated development risks.
In Britain, CPPIB has entered another large project through a 50-50 partnership with Land Securities to develop Victoria Circle in London’s West End. The project will have a completed value of £1bn ($1.8bn).
CPPIB and Westfield are partners in a $3bn portfolio of British and US shopping malls.
The relationship started with the Canadian fund’s investment in the Westfield UK Shopping Centre Fund, alongside Westfield and APG in 2010, but it has since sold the £300 million stake.
In the subsequent two years, CPPIB invested with Westfield in its huge Stratford shopping centre in east London and, in 2012, bought a 25 per cent stake in 10 shopping centres owned by Westfield in the US. The latter was its single largest property investment.
“We’ve built a relationship with groups like Westfield and Goodman, which are also global players, and we go with them to new markets,” Mr Eadie said.
“In fact, we first partnered with Goodman in China, before we came to Australia and then we went with them to the US.”
CPPIB has partnered with Global Logistic Properties (GLP) to invest in Japan and then Brazil, while it co-invests with European managers for exposure to the eurozone. The pension fund has entrusted almost $3bn with Greg Goodman’s Goodman Group to invest in its projects in Australia, China, Hong Kong and the US with Goodman instrumental in CPPIB entering the logistics/warehouse markets in China and the US.
It chose to partner with Goodman in its foray into the US because it saw a growing demand for new industrial buildings in that market. Mr Eadie has described the partnership as “a good opportunity for us and a new market for them”. The Canadian fund entered Australia in 2007 with a stake in a wholesale fund managed by Dexus. It exited from the investment, valued at $180m, in February last year.
It took two years — and the aftermath of the global financial crisis — for CPPIB to ramp up its Australian holdings.
Australian property companies faced dire refinancing problems during the financial crisis, with heavy debt loads as global liquidity dried up.
The timing was perfect for CPPIB. By 2011 it had participated in the privatisation of the former listed ING Industrial Fund to access a large portfolio of industrial property, since renamed Goodman Australia Trust.
Also in 2011, it took part in refinancing a wholesale fund, managed by Colonial First State Global Asset Management, giving it entree to Australian shopping centres.
CPPIB’s funds under management rose from $C161.6bn at March 31 last year to $C201.5bn by December 31 last year.
Real estate investment accounted for 10.9 per cent of the pension fund’s total investment ($C21.9bn) at December 31, 2013, but Mr Eadie said CPPIB did not set fixed allocations for each asset class.
Property competes with other asset classes for allocations.
“We go to where the opportunities are, but we are selective in what we buy. We will look at countries, cities, and even sub-markets within cities,” he said.
As well as property, the Canadian fund owns Westlink M7 motorway in NSW, acquired for $3.4bn from Intoll Group in 2010, and Broadcast Australia, the former Macquarie Broadcasting Group ($1.64bn).
Investments in Australia have now reached a level where CPPIB is considering whether to set up an Australian office.